Chapter 2Understanding Strategies

Chapter Objectives

To study and understand the goals in any organization

To understand strategies at two levels-

The corporate level and

The business unit level

GOALS - Profitability Profitability- most important goal, broadest

is a product of two ratios:1. profit margin percentageX2. investment turnover i.e.

(revenues-expenses/revenues) X (revenues/investment)Result is Return on Investment (ROI)=((revenue-expenses)/investment)

Profitability refers to profits in long run

Q) What does profitability depict?

Does the company’s goal, change its interpretation of profitability equation?

GOALS - Maximizing Shareholder ValueQ) Maximizing Shareholder Value means what? Is earning maximum and increasing

profitability same?

Maximizing shareholder value may be a major goal but not the only goal

GOALS- Risk

Risk also means POSSIBILITIES

The risk-taking varies from company to company, among personalities and managers

Some companies make it very clear that the primary responsibility is to preserve company’s assets

GOALS -Multiple Stakeholder Approach Organizations deal in – capital market,

product market, factor market

The firm has responsibilities to all these multiple stakeholders

The Concept of Strategy

Strategies describe the general direction in which an organization plans to move to attain its goals

Core Competencies Industry Opportunities

Strategies

Two Levels Of StrategyCorporate LevelBusiness Unit Level

Corporate Level Strategy Is about being in the right mix of businesses

Concerns of questions like where to compete than how

Degree ofRelatedness

Extent of DiversificationHigh

High

Low

Corporate-level Strategies

McDonald’s

P&G

Textron

Contd…

Single Industry Firms

Unrelated Diversified Firms

Related Diversified Firms

Business Unit Strategies

Depends on two interrelated aspects: Its mission Its competitive advantage

Business Unit Mission The BCG Model

build, hold, harvest, divest Business Unit Competitive Advantage

Porter’s Five Force Model Value Chain for Business